UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to
Commission File Number 0-24383
WORKFLOW MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1507104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification No.)
241 Royal Palm Way
Palm Beach, FL 33480
(Address of principal executive offices) (Zip Code)
(561) 659-6551
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___.
---
As of December 5, 2000, there were 12,947,417 shares of common stock
outstanding.
WORKFLOW MANAGEMENT, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet..............................................................................3
October 31, 2000 (unaudited) and April 30, 2000
Consolidated Statement of Income (unaudited)............................................................4
For the three and six months ended October 31, 2000 and October 23, 1999
Consolidated Statement of Cash Flows (unaudited)........................................................5
For the three and six months ended October 31, 2000 and October 23, 1999
Notes to Consolidated Financial Statements (unaudited)..................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................................15
Item 3. Quantitative and Qualitative Disclosure About Market Risk..............................................23
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................................................24
Item 6. Exhibits and Reports on Form 8-K.......................................................................24
Signatures........................................................................................................25
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
October 31, April 30,
ASSETS 2000 2000
- ------ ------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,521 $ 2,851
Accounts receivable, less allowance for doubtful
accounts of $3,977 and $4,191, respectively 96,009 100,366
Inventories 48,520 46,223
Prepaid expenses and other current assets 12,874 11,405
------------ ------------
Total current assets 158,924 160,845
Property and equipment, net 55,682 55,859
Intangible assets, net 102,323 92,650
Other assets 11,439 12,346
Net assets held for sale 1,900 10,012
------------ ------------
Total assets $ 330,268 $ 331,712
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term debt $ 1,019 $ 1,139
Note payable for acquisition 8,000 10,337
Accounts payable 39,901 33,950
Accrued compensation 12,520 15,824
Accrued additional purchase consideration 7,249 9,581
Accrued income taxes 396 4,654
Other accrued liabilities 19,854 15,388
------------ ------------
Total current liabilities 88,939 90,873
Long-term credit facility 136,626 135,695
Subordinated related party debt 4,195 4,174
Other long-term debt 4,541 5,005
Deferred income taxes 4,617 4,557
Other long-term liabilities 1,359 1,486
------------ ------------
Total liabilities 240,277 241,790
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding
Common stock, $.001 par value, 150,000,000 shares
authorized, 12,916,926 and 12,880,895 issued and
outstanding, respectively 13 13
Additional paid-in capital 52,517 51,981
Notes receivable from officers (4,775) (1,958)
Accumulated other comprehensive loss (4,557) (2,631)
Retained earnings 46,793 42,517
------------ ------------
Total stockholders' equity 89,991 89,922
------------ ------------
Total liabilities and stockholders' equity $ 330,268 $ 331,712
============ ============
See accompanying notes to consolidated financial statements.
Page 3
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- ---------------------------
October 31, October 23, October 31, October 23,
2000 1999 2000 1999
------------ ------------ ------------ -----------
Revenues $ 149,226 $ 131,760 $ 291,055 $ 250,221
Cost of revenues 105,110 93,330 205,739 176,926
------------ ------------ ------------ -----------
Gross profit 44,116 38,430 85,316 73,295
Selling, general and administrative expenses 35,323 28,175 69,935 54,398
Amortization expense 692 572 1,334 1,019
------------ ------------ ------------ -----------
Operating income 8,101 9,683 14,047 17,878
Interest expense 3,651 2,692 7,194 4,909
Interest income (146) (66) (269) (109)
Gain on sale of securities (1,808) (1,808)
Unrealized holding gain on trading securities (1,163) (1,163)
Loss on sale of subsidiary 318 318
Other (income) expense (129) 31 (195) (21)
------------ ------------ ------------ -----------
Income before provision for income taxes 4,725 9,679 7,317 15,752
Provision for income taxes 1,968 3,958 3,041 6,594
------------ ------------ ------------ -----------
Net income $ 2,757 $ 5,721 $ 4,276 $ 9,158
============ ============ ============ ===========
Income per share:
Basic $ 0.21 $ 0.45 $ 0.33 $ 0.73
Diluted $ 0.21 $ 0.43 $ 0.32 $ 0.68
Weighted average common shares outstanding:
Basic 12,915 12,622 12,903 12,612
Diluted 12,925 13,443 13,244 13,453
See accompanying notes to consolidated financial statements.
Page 4
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
---------------------------
October 31, October 23,
2000 1999
------------ -----------
Cash flows from operating activities:
Net income $ 4,276 $ 9,158
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 5,887 5,221
Cash paid for restructuring costs (673) (95)
Amortization of deferred financing costs 277 370
Gain on sale of securities (1,808)
Unrealized holding gain on trading securities (1,163)
Loss on sale of subsidiary 318
Changes in assets and liabilities (net of assets acquired
and liabilities assumed in business combinations):
Accounts receivable 6,865 (9,869)
Inventories (3,416) (1,648)
Prepaid expenses and other current assets (273) (3,277)
Accounts payable 4,799 (1,310)
Accrued compensation and other accrued liabilities (3,817) 3,559
----------- -----------
Net cash provided by (used in) operating activities 13,925 (544)
----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (6,940) (21,022)
Additions to property and equipment (5,121) (6,295)
Cash received for net assets held for sale 6,909
Cash paid for additional purchase consideration (6,478) (1,095)
Purchase of securities (2,400)
Proceeds on sale of securities 3,008
Cash received on the sale of property and equipment 238 537
Other (3) 178
----------- -----------
Net cash used in investing activities (11,395) (27,089)
----------- -----------
Cash flows from financing activities:
Proceeds from credit facility borrowings 60,506 52,350
Payments of credit facility borrowings (59,156) (25,825)
Payments of other long-term debt (423) (376)
Proceeds from issuance of other long-term debt 1,362
Payments of short-term debt, net (2,466) (639)
Payments of deferred financing costs (39) (186)
Proceeds from common stock issued under employee benefit programs 475 286
Issuance of notes receivable to officers (2,817)
Issuance of common stock to outside directors 55 54
----------- -----------
Net cash (used in) provided by financing activities (3,865) 27,026
----------- -----------
Effect of exchange rates on cash and cash equivalents 5
---------- -----------
Net decrease in cash and cash equivalents (1,330) (607)
Cash and cash equivalents at beginning of period 2,851 607
----------- -----------
Cash and cash equivalents at end of period $ 1,521 $ -
=========== ===========
(Continued)
Page 5
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
Six Months Ended
---------------------------
October 31, October 23,
2000 1999
------------ -----------
Supplemental disclosures of cash flow information:
Interest paid $ 6,898 $ 4,165
Income taxes paid $ 7,248 $ 6,325
During the six months ended October 31, 2000 and October 23, 1999, the Company
paid $6,940 and $21,022, respectively, which represents the aggregate of: 1) the
initial fixed consideration for purchase acquisitions and other purchase price
adjustments relating to certain acquisitions and 2) acquisition costs such as
legal and accounting fees associated with certain business combinations all of
which related to business combinations that were accounted for under the
purchase method of accounting. The fair value of the assets and liabilities at
the date of acquisition and the impact of recording the various acquisition
costs are presented as follows:
Six Months Ended
----------------------------
October 31, October 23,
2000 1999
------------ -----------
Accounts receivable $ 3,146 $ 5,021
Inventories 514 943
Prepaid expenses and other current assets 384 633
Property and equipment 345 1,679
Intangible assets 9,490 19,627
Other assets 158 99
Short-term debt (601)
Accounts payable (1,481) (3,386)
Accrued compensation and other accrued liabilities (5,573) (1,927)
Long-term debt (43) (1,066)
------------ -----------
Net assets acquired $ 6,940 $ 21,022
============ ===========
Non-cash transactions:
. During the six months ended October 31, 2000 and October 23, 1999, the
Company accrued $4,175 and $4,833, respectively, as additional purchase
consideration for earn-outs.
. During the six months ended October 31, 2000 and October 23, 1999, the
Company recorded additional paid-in capital of $6 and $74, respectively,
related to the tax benefit of stock options exercised.
. During the six months ended October 23, 1999, the Company sold one of its
subsidiaries and an associated building in exchange for notes receivable
totaling $4,690.
. During the six months ended October 23, 1999, the Company increased the
investment carrying value of its securities available for sale by recording
an unrealized holding gain in comprehensive income of $1,162.
See accompanying notes to consolidated financial statements.
Page 6
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 1 - NATURE OF BUSINESS
- ---------------------------
Workflow Management, Inc. (the "Company" or "Workflow Management") is a
leading integrator of graphic arts companies, providing a variety of custom
print products and office supplies and related management services to more than
44,000 businesses in the United States and Canada. The Company is comprised of
three main operating divisions: 1) the Integrated Business Services Division,
which provides customers with print management services, including an e-commerce
solution, iGetSmart, designed to minimize the costs of procuring, storing and
using custom print products and office supplies, 2) the Fulfillment Division,
which prints and produces envelopes, custom business documents, commercial
print, labels, packaging and direct mail literature and 3) the iGetSmart.com
Division which owns the iGetSmart software source code, licenses the right to
use the software to other entities, including subsidiaries of the Company, and
provides warehousing services through a nationwide network of distribution
centers. Workflow Management employs approximately 2,900 persons and has 20
manufacturing facilities in 6 states and 4 Canadian provinces, 12 distribution
centers, 11 print-on-demand centers and 57 sales offices.
NOTE 2 - BASIS OF PRESENTATION
- -------------------------------
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of Workflow Management
and the companies acquired in business combinations accounted for under the
purchase method from their respective dates of acquisition.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. The
consolidated financial statements included in this Form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 2000.
As used in these consolidated financial statements and related notes to
consolidated financial statements, "Fiscal 2001", "Fiscal 2000" and "Fiscal
1999" refer to the Company's fiscal years ending April 30, 2001 and ended April
30, 2000 and April 24, 1999, respectively. During Fiscal 2000, the Company's
Board of Directors approved a change in the definition of the Company's fiscal
year-end date from the last Saturday in April to April 30th of each year. As a
result of this change, the three months ended October 31, 2000 and October 23,
1999 and the six months ended October 31, 2000 and October 23, 1999 consisted of
92, 91, 184 and 182 days, respectively.
Page 7
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 3 - INVENTORIES
- --------------------
Inventories consist of the following:
October 31, April 30,
2000 2000
------------ -----------
Raw materials $ 13,636 $ 15,130
Work-in-process 3,246 3,287
Finished goods 31,638 27,806
------------ -----------
Total inventories $ 48,520 $ 46,223
============ ===========
NOTE 4 - LONG-TERM DEBT
- -----------------------
Revolving Credit Facility
During Fiscal 2000, the Company entered into a secured $250,000 revolving
credit facility (the "Credit Facility") underwritten and agented by Fleet Bank.
The Credit Facility is composed of a $200,000 revolver, including a $50,000
sublimit for Canadian borrowings and a $50,000 amortizing term note. The Credit
Facility matures on March 10, 2004 and is secured by substantially all assets of
the Company and is subject to terms and conditions typical of a credit facility
of such type and size, including certain financial covenants, which include a
total debt to proforma EBITDA maximum of 3.75 to 1.0. Interest rate options are
available to the Company conditioned on certain leverage tests. The maximum rate
of interest is the prime rate from time to time in effect. The Credit Facility
is also available to fund the cash portion of future acquisitions, subject to
the maintenance of bank covenants and total availability under the facility. At
October 31, 2000, the Company had approximately $136,626 outstanding under the
Credit Facility, at an annual interest rate of approximately 9.34%, and $113,374
available under the Credit Facility for acquisitions and working capital
purposes. During the six months ended October 31, 2000, the Company incurred
$6,633 in interest expense relating to the Credit Facility.
Subordinated Related Party Debt
During Fiscal 1999, the Company issued $4,127 in subordinated unsecured
notes including attached warrants with a value of $751 at the time of the debt
issuance (the "Subordinated Notes") to certain members of the Company's
management for $4,878. The proceeds from the Subordinated Notes were used to
repurchase the Company's common stock. The Subordinated Notes mature on January
18, 2009, and have a stated coupon of 12% payable semi-annually in arrears. The
attached warrants are exercisable into shares of Company Common Stock at a
nominal cost and will be issued on each anniversary of the purchase of the
Subordinated Notes at an amount sufficient to provide a 15% total annual return
to each holder. Upon the payment in full of the Subordinated Notes, or upon a
change of control of the Company (as defined in the Subordinated Notes), the
warrants previously issued to the note holders will be returned to the Company
and reissued in an amount which would provide for at least a 15%, but not more
than an 18%, total annual return to each note holder. The indebtedness evidenced
by the Subordinated Notes is subordinate to all amounts outstanding under the
Credit Facility. In addition to payment and other customary default provisions,
the Company would be in default under the terms of the Subordinated Notes if
more than $5,000 of the Company's debt under the Credit Facility was
accelerated. Any such acceleration could occur if the Company defaulted under
the terms of the Credit Facility. Based upon an analysis performed by an
Page 8
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
independent lending institution acting as a financial advisor to the Company,
Workflow Management believes that the terms and conditions of the Subordinated
Notes were no less favorable than the terms and conditions that would have been
available in an arm's-length transaction with unaffiliated third parties.
Interest expense for the six months ended October 31, 2000 relating to the
Subordinated Notes was $326. During Fiscal 2000, the Company issued 5 warrants
related to the Subordinated Notes.
NOTE 5 - STOCKHOLDERS' EQUITY
- -----------------------------
Changes in stockholders' equity during the six months ended October 31, 2000
were as follows:
Stockholders' equity balance at April 30, 2000 $ 89,922
Issuance of common stock in conjunction with:
Exercise of stock options, including tax benefits 49
Employee stock purchase program 432
Fees paid to outside members of the Company's Board of Directors 55
Issuance of notes receivable from officers (2,817)
Comprehensive income 2,350
-------------
Stockholders' equity balance at October 31, 2000 $ 89,991
=============
Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
----------------------------- ---------------------------
October 31, October 23, October 31, October 23,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income $ 2,757 $ 5,721 $ 4,276 $ 9,158
Other comprehensive income:
Foreign currency translation adjustment (826) 628 (1,926) (226)
Unrealized gain on available-for-sale securities 1,162 1,162
----------- ----------- ----------- -----------
Comprehensive income $ 1,931 $ 7,511 $ 2,350 $ 10,094
=========== =========== =========== ===========
Notes Receivable from Officers
In August 1998 and October 2000, the Company extended secured loans to
certain members of management for the purchase, in the open market, of the
Company's common stock ("Company Common Stock") by those individuals. The notes
are full recourse promissory notes bearing interest at 6.75% and 8.0% per annum.
Principal and interest on the notes issued in August 1998 and in October 2000
are payable at maturity on August 31, 2001 and on demand, no later than January
2, 2003, respectively. At October 31, 2000, $4,775 and $285 in principal and
interest, respectively, were outstanding.
Page 9
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 6 - SALE OF SUBSIDIARY
- ---------------------------
On September 24, 1999, the Company sold all of the outstanding capital
stock of Hano Document Printers, Inc. ("Hano") for $3,800 and recorded a pre-tax
loss on the sale of $318. Sale proceeds consisted of a $1,246, 8% note due on
November 30, 1999 ("Short Term Note") and a $2,544, 8.0% note payable in
interest only installments until October 1, 2002 when principal and interest
payments will be made until the maturity date of September 1, 2009. The
purchaser of Hano's stock has paid off the Short Term Note. The remaining note
is secured by all of the assets of Hano and is subject to a limited guarantee
with a third party up to a maximum of $2,000. The Company also entered into an
agreement with Hano to sublease building space from Hano for $23 per month
through December 2004.
The limited guarantee on the sale of Hano is solely enforceable through
foreclosure on a warehouse, which the Company sold to the third party guarantor
concurrent with the Hano sale. Sale proceeds consisted of a $900, 7.5% note
payable in interest only installments until September 24, 2005 when principal
and interest payments will be made until the maturity date of August 31, 2009.
The note is collateralized by a first mortgage on the warehouse. The Company
entered into a lease for the warehouse for $10 per month through August 2004,
then increasing to $15 per month through August 2009.
NOTE 7 - INVESTMENT IN COMMON STOCK
- -----------------------------------
In September 1999, the Company purchased shares of a corporation's common
stock in one transaction for $2,400. The Company sold shares during the three
months ended October 23, 1999 and recorded a gain of $1,800. The Company sold
additional shares in November 1999 and classified these shares as trading
securities at October 23, 1999, which resulted in the Company reporting an
unrealized holding gain of $1,162 as other income for the three months ended
October 23, 1999. The remaining shares held by the Company at October 23, 1999
were classified as available-for-sale based on the Company's intent and ability
to retain the shares and resulted in an unrealized holding gain of $1,162 which
was included in other comprehensive income at October 23, 1999. At October 31,
2000, all shares of this corporation's common stock have been sold.
Page 10
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 8 - EARNINGS PER SHARE ("EPS")
- -----------------------------------
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The following information presents the Company's computations
of basic and diluted EPS for the periods presented in the consolidated statement
of income:
Three Months Ended Six Months Ended
---------------------------- ---------------------------
October 31, October 23, October 31, October 23,
2000 1999 2000 1999
------------ ------------ ------------ -----------
Basic earnings per share:
Net income $ 2,757 $ 5,721 $ 4,276 $ 9,158
============ ============ ============ ============
Weighted average number of
common shares outstanding 12,915 12,622 12,903 12,612
============ ============ ============ ============
Basic earnings per share $ 0.21 $ 0.45 $ 0.33 $ 0.73
============ ============ ============ ============
Diluted earnings per share:
Net income $ 2,757 $ 5,721 $ 4,276 $ 9,158
============ ============ ============ ============
Weighted average number of:
Common shares outstanding 12,915 12,622 12,903 12,612
Effect of dilutive employee stock options* 10 821 341 841
------------ ------------ ------------ ------------
Total 12,925 13,443 13,244 13,453
============ ============ ============ ============
Diluted earnings per share $ 0.21 $ 0.43 $ 0.32 $ 0.68
============ ============ ============ ============
* The Company had additional employee stock options outstanding during the
periods presented that were not included in the computation of diluted earnings
per share because they were anti-dilutive. Options to purchase 4,815 and 504
shares of common stock were anti-dilutive and outstanding during the six months
ended October 31, 2000 and October 23, 1999, respectively.
Page 11
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 9 - BUSINESS COMBINATIONS
- ------------------------------
During the six month period ended October 31, 2000, the Company completed
two business combinations which were accounted for under the purchase method for
an aggregate purchase price of $6,940 consisting entirely of cash. The total
assets related to these acquisitions were $14,037, including goodwill and other
intangible assets of $9,490. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
During Fiscal 2000, the Company made six acquisitions accounted for under
the purchase method for an aggregate purchase price of $46,807, consisting of
$36,470 in cash and notes payable of $10,337. The total assets related to these
acquisitions were $69,584, including intangible assets of $30,916. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.
Following the acquisition of Office Electronics, Inc. ("OEI") during Fiscal
2000, the Company decided to sell certain of OEI's manufacturing divisions and
the related assets. As of October 31, 2000 all manufacturing divisions and
assets except for the St. Louis division and its facility and the real estate
upon which one other former OEI facility was located, have been sold. At October
31, 2000 the carrying value of these net assets held for sale is based upon the
net realizable value of the facilities.
Most of the Company's acquisitions have earn-out provisions that could
result in additional purchase consideration payable in subsequent periods,
ranging from three to five years, dependent upon the future earnings of the
acquired companies. Additional purchase consideration of $6,478 and $1,095 was
paid by the Company in connection with these earn-out provisions during the six
months ended October 31, 2000 and October 23, 1999, respectively, and another
$7,249 is accrued for these earn-out provisions at October 31, 2000. This
additional consideration, whether paid or accrued, has been reflected in the
accompanying balance sheet as goodwill at October 31, 2000.
The following presents the unaudited pro forma results of operations of the
Company for the three and six month periods ended October 31, 2000 and October
23, 1999, as if the divestiture of a subsidiary and the purchase acquisitions
completed since the beginning of Fiscal 2000 had been consummated at the
beginning of Fiscal 2000. The pro forma results of operations include certain
pro forma adjustments including the amortization of intangible assets and
reductions in executive compensation at the acquired companies of $107, $233,
$214 and $716 for the three months ended October 31, 2000 and October 23, 1999,
and the six months ended October 31, 2000 and October 23, 1999, respectively.
Three Months Ended Six Months Ended
---------------------------- ---------------------------
October 31, October 23, October 31, October 23,
2000 1999 2000 1999
----------- ------------ ------------ -----------
Revenues $ 153,783 $ 152,519 $ 299,422 $ 292,818
Net income 3,106 6,068 4,841 10,198
Earnings per share:
Basic $ 0.24 $ 0.48 $ 0.38 $ 0.81
Diluted 0.24 0.45 0.37 0.76
Page 12
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions and the divestiture occurred at the beginning of
Fiscal 2000 or the results that may occur in the future.
NOTE 10 - SEGMENT REPORTING
- ---------------------------
The Company's operating segments prepare separate financial information
that is evaluated regularly by the Company's Executive Officers. Operating
segments of the Company are defined primarily by the segment operation's core
business function whether it is: a) the procurement and subsequent distribution
of product to the customer, b) the sale of an internally manufactured product to
the customer or c) the license of software source code and provision of
warehousing services to other entities. The Company has determined that its
operating activities consist of three reportable operating segments: the
Company's Integrated Business Services Division, the Company's Fulfillment
Division and the Company's iGetSmart.com Division.
The Company's Integrated Business Services Division represents those
subsidiaries of the Company that procure product, primarily custom print
products and office supplies, and distribute it to customers through one of the
Company's distribution centers or directly from the product's manufacturer. The
Company's Fulfillment Division represents those subsidiaries primarily engaged
in the sale of products internally manufactured at the Company. The Fulfillment
Division provides envelopes, commercial print products, custom forms and
documents, annual reports, direct mail pieces, specialty packaging, labels and
advertising specialty products to its customers. The Fulfillment Division also
provides product to the Company's Integrated Business Services Division for
distribution to customers. The iGetSmart.com Division owns the proprietary
iGetSmart electronic inventory and distribution system. The iGetSmart.com
Division licenses the use of the iGetSmart source code to other entities,
including subsidiaries of the Company, and provides warehousing services.
Corporate expenses include the costs of maintaining a corporate office. The
Company does not allocate corporate overhead by segment in assessing
performance.
Operating Segments
The following table sets forth information as to the Company's reportable
operating segments:
Three Months Ended Six Months Ended
--------------------------- ---------------------------
October 31, October 23, October 31, October 23,
2000 1999 2000 1999
------------ ------------ ------------ -----------
Revenues:
Integrated Business Services Division $ 67,930 $ 51,305 $ 133,368 $ 95,180
Fulfillment Division 83,881 82,360 162,597 159,554
iGetSmart.com Division 3,386 6,242
Intersegment (5,971) (1,905) (11,152) (4,513)
------------ ----------- ------------ -----------
Total $ 149,226 $ 131,760 $ 291,055 $ 250,221
============ =========== ============ ===========
Operating income:
Integrated Business Services Division $ 3,461 $ 5,045 $ 7,127 $ 8,636
Fulfillment Division 7,644 6,829 13,141 13,039
iGetSmart.com Division 217 (341)
Corporate (3,221) (2,191) (5,880) (3,797)
------------ ----------- ------------ -----------
Total $ 8,101 $ 9,683 $ 14,047 $ 17,878
============ =========== ============ ===========
Page 13
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
October 31, April 30,
2000 2000
------------ -----------
Identifiable assets (at period end):
Integrated Business Services Division $ 120,990 $ 134,673
Fulfillment Division 180,458 181,461
iGetSmart.com Division 9,265
Corporate 19,555 15,578
------------ -----------
Total $ 330,268 $ 331,712
============ ===========
Geographic Segments
The following table sets forth information as to the Company's
operations in its different geographic segments:
Three Months Ended Six Months Ended
---------------------------- ---------------------------
October 31, October 23, October 31, October 23,
2000 1999 2000 1999
------------ ------------ ------------ -----------
Revenues:
United States $ 112,528 $ 96,530 $ 217,712 $ 180,981
Canada 36,698 35,230 73,343 69,240
------------ ------------ ------------ -----------
Total $ 149,226 $ 131,760 $ 291,055 $ 250,221
============ ============ ============ ===========
Operating income:
United States $ 4,743 $ 6,728 $ 7,665 $ 12,294
Canada 3,358 2,955 6,382 5,584
------------ ------------ ------------ -----------
Total $ 8,101 $ 9,683 $ 14,047 $ 17,878
============ ============ ============ ===========
October 31, April 30,
2000 2000
------------ -----------
Identifiable assets (at period end):
United States $ 271,577 $ 267,398
Canada 58,691 64,314
------------ -----------
Total $ 330,268 $ 331,712
============ ===========
NOTE 11 - SUBSEQUENT EVENT
- --------------------------
On December 8, 2000, the Company repaid in full the Subordinated Notes for
$4,878. As defined in the Subordinated Notes, warrants previously issued to the
note holders were returned to the Company and reissued in an amount sufficient
to provide a 15.0% total annual return to each holder. The Company issued 42
warrants which are exercisable into shares of Company Common Stock at a nominal
cost.
Page 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate," "intend," "may," "will," "expect" and
similar expressions as they relate to Workflow Management, Inc. (the "Company"
or "Workflow Management") or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements, which are made only as of the date hereof.
Introduction
Workflow Management, Inc. (the "Company" or "Workflow Management") is a
leading integrator of graphic arts companies, providing a variety of custom
print products and office supplies and related management services to more than
44,000 businesses in the United States and Canada. The Company is comprised of
three main operating divisions: 1) the Integrated Business Services Division,
which provides customers with print management services, including an e-commerce
solution, iGetSmart, designed to minimize the costs of procuring, storing and
using custom print products and office supplies, 2) the Fulfillment Division,
which prints and produces envelopes, custom business documents, commercial
print, labels, packaging and direct mail literature and 3) the iGetSmart.com
Division which owns the proprietary iGetSmart inventory and distribution system.
The iGetSmart.com Division licenses the use of the source code to other entities
for a fee, including subsidiaries of the Company. Workflow Management employs
approximately 2,900 persons and has 20 manufacturing facilities in 6 states and
4 Canadian provinces, 12 distribution centers, 11 print-on-demand centers and 57
sales offices.
As used in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, "Fiscal 2001" and "Fiscal 2000" refer to
the Company's fiscal years ending April 30, 2001 and ended April 30, 2000,
respectively. During Fiscal 2000, the Company's Board of Directors approved a
change in the definition of the Company's fiscal year-end date from the last
Saturday in April to April 30th of each year. As a result of this change, the
three months ended October 31, 2000 and October 23, 1999 and the six months
ended October 31, 2000 and October 23, 1999 consisted of 92, 91, 184 and 182
days, respectively.
The following discussion should be read in conjunction with the
consolidated historical financial statements, including the related notes
thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as
the Company's audited consolidated financial statements, and notes thereto, for
the fiscal year ended April 30, 2000 included in the Company's Annual Report on
Form 10-K.
Page 15
Consolidated Results of Operations
Three Months Ended October 31, 2000 Compared to Three Months Ended October 23,
1999
Consolidated revenues increased 13.3%, from $131.8 million for the three
months ended October 23, 1999, to $149.2 million for the three months ended
October 31, 2000. The Company's Integrated Business Services Division revenues
increased by $16.6 million or 32.4% and its Fulfillment Division revenues
increased by $1.5 million or 1.9% when comparing the three months ended October
31, 2000 to the three months ended October 23, 1999. These increases were
primarily due to the Company's business combinations consummated after October
23, 1999. Revenues for the three months ended October 31, 2000 and October 23,
1999, include revenues from six companies acquired in business combinations
accounted for under the purchase method after the beginning of the second
quarter of Fiscal 2000 (the "Purchased Companies"). The Company's iGetSmart.com
Division had total revenues of $3.4 million for three months ended October 31,
2000. Total revenues at iGetSmart.com consisted of $3.2 million in
interdivisional revenues to the Company's other subsidiaries. These
interdivisional revenues were eliminated upon consolidation.
International revenues increased 4.2%, from $35.2 million, or 26.7% of
consolidated revenues, for the three months ended October 23, 1999, to $36.7
million, or 24.6% of consolidated revenues, for the three months ended October
31, 2000. International revenues consisted exclusively of revenues generated in
Canada.
Gross profit increased 14.8%, from $38.4 million, or 29.2% of revenues, for
the three months ended October 23, 1999, to $44.1 million, or 29.6% of revenues,
for the three months ended October 31, 2000. The increase in gross profit was
primarily due to the Purchased Companies. The increase in gross profit as a
percentage of revenues was due to the Purchased Companies generating gross
profit at a higher percentage of revenues than historically recognized by the
Company.
Selling, general and administrative expenses increased 25.4%, from $28.2
million, or 21.4% of revenues, for the three months ended October 23, 1999, to
$35.3 million, or 23.7% of revenues, for the three months ended October 31,
2000. The increase in selling, general and administrative expenses was primarily
due to the Purchased Companies and the spending in the Company's iGetSmart.com
Division. During the quarter, the Company incurred approximately $1.4 million in
additional expenses to further develop and market the iGetSmart technology and
to hire additional personnel.
Amortization expense increased 21.0% from $572,000 or 0.4% of revenues for
the three months ended October 23, 1999, to $692,000 or 0.5% of revenues for the
three months ended October 31, 2000. This increase was due exclusively to the
increased number of acquisitions accounted for under the purchase method that
are included in the Company's results for the three months ended October 31,
2000 versus the three months ended October 23, 1999.
Interest expense, net of interest income, increased 33.5%, from $2.6 million
for the three months ended October 23, 1999, to $3.5 million for the three
months ended October 31, 2000. This increase in net interest expense was due to
the increased level of debt outstanding during the three months ended October
31, 2000 and the increase in overall market interest rates, including the
interest rate associated with the Company's secured credit facility.
Page 16
On September 24, 1999, the Company sold all of the outstanding capital stock
of Hano Document Printers, Inc. ("Hano") for $3.8 million and recorded a pre-tax
loss on the sale of $318,000. Sale proceeds consisted of a $1.3 million 8% note
due on November 30, 1999 ("Short Term Note") and a $2.5 million 8% note payable
in interest only installments until October 1, 2002 when principal and interest
payments will be made until the maturity date of September 1, 2009. The
purchaser of Hano's stock has paid off the Short Term Note. The remaining note
is collateralized by all of the assets of Hano and is subject to a limited
guarantee with a third party up to a maximum of $2.0 million. The Company also
entered into an agreement with Hano to sublease building space from Hano for
$23,000 per month through December 2004.
The limited guarantee on the sale of Hano is solely enforceable through
foreclosure on a warehouse, which the Company sold to the third party guarantor
concurrent with the Hano sale. Sale proceeds consisted of a $900,000 7.5% note
payable in interest only installments until September 24, 2005 when principal
and interest payments will be made until the maturity date of August 31, 2009.
The note is collateralized by a first mortgage on the warehouse. The Company
entered into a lease for the warehouse for $10,000 per month through August
2004, then increasing to $15,000 per month through August 2009.
In September 1999, the Company purchased shares of a corporation's common
stock in one transaction for $2.4 million. The Company sold shares during the
three months ended October 23, 1999 and recorded a gain of $1.8 million. The
Company sold additional shares in November 1999 and classified these shares as
trading securities at October 23, 1999, which resulted in the Company reporting
an unrealized holding gain of $1.2 million as other income for the three months
ended October 23, 1999. The remaining shares held by the Company at October 23,
1999 were classified as available-for-sale based on the Company's intent and
ability to retain the shares and resulted in an unrealized holding gain of $1.2
million which was included in other comprehensive income at October 23, 1999. At
October 31, 2000, all shares of this corporation's common stock have been sold.
Other expense, net of other income decreased 516.0% from $31,000 for the
three months ended October 23, 1999, to other income of $129,000 for the three
months ended October 31, 2000. Other income primarily represents the net of
gains and/or losses on sales of equipment and miscellaneous other income and
expense items.
Provision for income taxes decreased 50.3% from $4.0 million for the three
months ended October 23, 1999 to $2.0 million for the three months ended October
31, 2000, reflecting effective income tax rates of 40.9% and 41.7%,
respectively. During both periods, the effective income tax rates reflect the
recording of tax provisions at the federal statutory rate of 34.0%, plus
appropriate state and local taxes. In addition, the effective tax rates were
adjusted to reflect the incurrence of non-deductible goodwill amortization
expense resulting from the acquisitions of certain Purchased Companies. During
the three months ended October 23, 1999, the effective income tax rate was
reduced due to the fact that the marketable securities gains were taxed at a
35.0% rate.
Six Months Ended October 31, 2000 Compared to Six Months Ended October 23, 1999
Consolidated revenues increased 16.3%, from $250.2 million for the six months
ended October 23, 1999, to $291.1 million for the six months ended October 31,
2000. The Company's Integrated Business Services Division revenues increased by
$38.2 million or 40.1% and its Fulfillment Division revenues increased by $3.0
million or 1.9% when comparing the six months ended October 31, 2000 to the six
months ended October 23, 1999. These increases were primarily due to the
Company's business combinations consummated after October 23, 1999. Revenues for
the six months ended October 31, 2000, include revenues from eight companies
acquired in business combinations accounted for under the purchase method after
the beginning of the first quarter of Fiscal 2000 (the "Purchased Companies").
The Company's iGetSmart.com Division had total revenues of $6.2 million for six
months ended October 31, 2000. Total revenues at iGetSmart.com consisted of $6.0
million in interdivisional revenues to the Company's other subsidiaries. These
interdivisional revenues were eliminated upon consolidation.
Page 17
International revenues increased 5.9%, from $69.2 million, or 27.7% of
consolidated revenues, for the six months ended October 23, 1999, to $73.3
million, or 25.2% of consolidated revenues, for the six months ended October 31,
2000.
Gross profit increased 16.4%, from $73.3 million, or 29.3% of revenues, for
the six months ended October 23, 1999, to $85.3 million, or 29.3% of revenues,
for the six months ended October 31, 2000. The increase in gross profit was
primarily due to the Purchased Companies.
Selling, general and administrative expenses increased 28.6%, from $54.4
million, or 21.7% of revenues, for the six months ended October 23, 1999, to
$69.9 million, or 24.0% of revenues, for the six months ended October 31, 2000.
The increase in selling, general and administrative expenses was primarily due
to the Purchased Companies and the spending in the Company's iGetSmart.com
Division. During the six months ended October 31, 2000, the Company incurred
approximately $3.0 million in additional expenses to further develop and market
the iGetSmart technology.
Amortization expense increased 30.9%, from $1.0 million, or 0.4% of revenues,
for the six months ended October 23, 1999, to $1.3 million, or 0.5% of revenues,
for the six months ended October 31, 2000. This increase was due exclusively to
the increased number of acquisitions accounted for under the purchase method
that are included in the Company's results for the six months ended October 31,
2000 versus the six months ended October 31, 1999.
Interest expense, net of interest income, increased 44.3%, from $4.8 million
for the six months ended October 23, 1999, to $6.9 million for the six months
ended October 31, 2000. This increase in net interest expense was due to the
increased level of debt outstanding during the six months ended October 31, 2000
and the increase in overall market interest rates, including the interest rate
associated with the Company's secured credit facility.
As discussed above, in September 1999, the Company sold all of the
outstanding capital stock of Hano for $3.8 million and recorded a pre-tax loss
on the sale of $318,000.
As also discussed above, in September 1999, the Company sold shares of a
corporation's common stock during the six months ended October 23, 1999 and
recognized a realized gain of $1.8 million and an unrealized gain of $1.2
million. At October 31, 2000, all shares of this corporation's common stock have
been sold.
Other income increased 829.0% from $21,000 for the six months ended October
23, 1999, to $195,000 for the six months ended October 31, 2000. Other income
primarily represents the net of gains and/or losses on sales of equipment and
miscellaneous other income and expense items.
Provision for income taxes decreased 53.9% from $6.6 million for the six
months ended October 23, 1999 to $3.0 million for the six months ended October
31, 2000, reflecting effective income tax rates of 41.9% and 41.6%,
respectively. During both periods, the effective income tax rates reflect the
recording of tax provisions at the federal statutory rate of 34.0%, plus
appropriate state and local taxes. In addition, the effective tax rates were
adjusted to reflect the incurrence of non-deductible goodwill amortization
expense resulting from the acquisitions of certain Purchased Companies. During
the six months ended October 23, 1999 the effective income tax rate was reduced
due to the fact that the marketable security gains were taxed at a 35.0% rate.
Page 18
Liquidity and Capital Resources
At October 31, 2000, the Company had working capital of $70.0 million. The
Company's capitalization, defined as the sum of long-term debt, subordinated
related party debt and stockholders' equity, at October 31, 2000 was
approximately $235.4 million.
Workflow Management uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents are typically on hand as any excess cash would be used to pay down
the Company's revolving credit facility. Cash at October 31, 2000, primarily
represented customer collections and in-transit cash sweeps from the Company's
subsidiaries at the end of the quarter.
Workflow Management's anticipated capital expenditures budget for the next
twelve months is approximately $15.0 million for new equipment and maintenance.
During the six months ended October 31, 2000, net cash provided by operating
activities was $13.9 million. Net cash used in investing activities was $11.4
million, including $13.4 million used for acquisitions and additional purchase
consideration, $5.1 million used for capital expenditures which were partially
offset by the collection of $6.9 million for net assets held for sale. Net cash
used by financing activities was $3.9 million, which included $1.4 million in
net borrowings by the Company on its revolving credit facility to primarily pay
for the acquisitions consummated during the quarter, additional purchase
considerations due under the earn-outs agreements and $2.5 million in payments
of other short-term debt.
During the six months ended October 23, 1999, net cash used in operating
activities was $0.5 million. Net cash used in investing activities was $27.1
million, including $22.1 million used for acquisitions and additional purchase
consideration, $6.3 million used for capital expenditures and $2.4 million used
for the purchase of marketable securities which were partially offset by $3.0
million generated from the sale of certain securities. Net cash provided by
financing activities was $27.0 million, which included $26.5 million in net
borrowings by the Company on its revolving credit facility to primarily pay for
acquisitions.
Workflow Management has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 25.2% of the Company's
total net sales for the six months ended October 31, 2000. As a result, Workflow
Management is subject to certain risks inherent in conducting business
internationally, including fluctuations in currency exchange rates. Changes in
exchange rates may have a significant effect on the Company's business,
financial condition and results of operations.
During Fiscal 2000, the Company entered into a secured $250.0 million
revolving credit facility (the "Credit Facility") underwritten and agented by
Fleet Bank. The Credit Facility is composed of a $200.0 million revolver,
including a $50.0 million sublimit for Canadian borrowings, and a $50.0 million
amortizing term note. The Credit Facility matures on March 10, 2004 and is
secured by substantially all assets of the Company and is subject to terms and
conditions typical of a credit facility of such type and size, including certain
financial covenants. The financial covenants include a total debt to proforma
EBITDA maximum of 3.75 to 1.0. Interest rate options are available to the
Company conditioned on certain leverage tests. The maximum rate of interest is
the prime rate from time to time in effect. The Credit Facility is also
available to fund the cash portion of future acquisitions, subject to the
maintenance of bank covenants and total availability under the facility. At
December 5, 2000, the Company had approximately $149.3 million outstanding under
the Credit Facility, at an annual interest rate of approximately 9.29%, and
$100.7 million available under the Credit Facility for acquisitions and working
capital purposes.
During Fiscal 1999, the Company issued $4.1 million in subordinated unsecured
notes including attached warrants with a value of $0.8 million at the time of
the debt issuance (the "Subordinated Notes") to certain members of the Company's
management for $4.9 million. The proceeds from the Subordinated Notes were used
to repurchase common stock of the Company. The Subordinated Notes have a stated
coupon of 12% payable semi-annually in arrears. The attached warrants are
exercisable into shares of Company common stock ("Company Common Stock") at a
nominal cost and will be issued on each anniversary of the purchase of the
Subordinated Notes at an amount sufficient to provide a 15% total annual return
to
Page 19
each holder. On December 8, 2000, the Company repaid in full the Subordinated
Notes for $4.9 million. As defined in the Subordinated Notes, warrants
previously issued to the note holders were returned to the Company and reissued
in an amount sufficient to provide a 15.0% total annual return to each holder.
The Company issued 42,104 warrants which are exercisable into shares of Company
Common Stock at a nominal cost.
The Company was spun-off from U.S Office Products Company ("U.S. Office
Products") on June 9, 1998, pursuant to the terms and conditions of a
distribution agreement ("Distribution Agreement") between the Company, U.S.
Office Products and certain other entities that were also spun-off by U.S.
Office Products. Under the terms of the Distribution Agreement, the Company is
obligated, subject to a maximum obligation of $1.75 million, to indemnify U.S.
Office Products for certain liabilities incurred by U.S. Office Products prior
to the spin-off, including liabilities under federal securities laws (the
"Indemnification Obligation"). This Indemnification Obligation is reduced by any
insurance proceeds actually recovered in respect of the Indemnification
Obligation and is shared on a pro rata basis with the other three divisions of
U.S. Office Products which were spun-off from U.S. Office Products.
U.S. Office Products has been named a defendant in various class action
lawsuits. These lawsuits generally allege violations of federal securities laws
by U.S. Office Products and other named defendants during the months preceding
the transaction consummated pursuant to the Distribution Agreement. The Company
has not received any notice or claim from U.S. Office Products alleging that
these lawsuits are within the scope of the Indemnification Obligation, but the
Company believes that certain liabilities and costs associated with these
lawsuits (up to a maximum of $1.75 million) are likely to be subject to the
Company's Indemnification Obligation. Nevertheless, the Company does not
presently anticipate that the Indemnification Obligation will have a material
adverse effect on the Company.
The Company anticipates that its current cash on hand, cash flow from
operations and additional financing available under the Credit Facility will be
sufficient to meet the Company's liquidity requirements for its operations and
acquisition purposes for the next twelve months. The Company expects that
additional financing under the Credit Facility will be sufficient to meet its
long-term liquidity requirements for operations. However, the Company intends to
pursue acquisitions in the next twelve months and thereafter which are expected
to be funded through cash, stock or a combination thereof. The Company may have
to seek additional funding for its long-term liquidity from the issuance of
additional bank debt, the issuance of public debt or the issuance of additional
common stock in the public markets. There can be no assurance that additional
sources of financing will not be required during the next twelve months or
thereafter.
Fluctuations in Quarterly Results of Operations
Workflow Management's envelope business is subject to seasonal influences
from year-end mailings. Both the Company's Integrated Business Services Division
and its Fulfillment Division are subject to seasonal influences of the potential
lower demand for office consumables during the summer months which coincide with
Workflow Management's fiscal quarters ending in July. As the Company continues
to complete acquisitions, it may become subject to other seasonal influences if
the businesses it acquires are seasonal.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover, the operating
margins of companies acquired may differ substantially from those of Workflow
Management, which could contribute to further fluctuation in its quarterly
operating results. Therefore, results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.
Page 20
Inflation
The Company does not believe that inflation has had a material impact on its
results of operations during the three and six month periods ended October 31,
2000 and October 23, 1999, respectively.
Factors Affecting the Company's Business
Risks Associated with Acquisitions and Divestitures
One of the Company's strategies is to increase its revenues and the markets
it serves through the acquisition of additional graphic arts businesses. There
can be no assurance that suitable candidates for acquisitions can be identified
or, if suitable candidates are identified, that acquisitions can be completed on
acceptable terms, if at all. In addition, the Company may determine that its
business interests would be best served by selling certain subsidiaries, assets
or operations to third parties. Accordingly, the Company has in the past
considered, and will continue to consider in the future, divestitures of certain
operations or assets to the extent management believes that such transactions
could improve the Company's overall financial condition and/or future prospects.
Any such divestitures would reduce the Company's revenues. Divestitures could
also (i) eliminate certain products or product lines that the Company has
historically offered to its customers and (ii) reduce or eliminate the Company's
presence in certain geographic markets.
Integration of acquired companies may involve a number of special risks that
could have a material adverse effect on the Company's operations and financial
performance, including adverse short-term effects on its reported operating
results (including those adverse short-term effects caused by severance payments
to employees of acquired companies, restructuring charges associated with the
acquisitions and other expenses associated with a change of control, as well as
non-recurring acquisition costs including accounting and legal fees, investment
banking fees, recognition of transaction-related obligations and various other
acquisition-related costs); diversion of management's attention; difficulties
with retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets. Furthermore, although Workflow Management conducts due
diligence and generally requires representations, warranties and
indemnifications from the former owners of acquired companies, there can be no
assurance that such owners will have accurately represented the financial and
operating conditions of their companies. If an acquired company's financial or
operating results were misrepresented, the acquisition could have a material
adverse effect on the results of operations and financial condition of Workflow
Management.
Workflow Management may in the future seek to finance its acquisitions by
using shares of Company Common Stock. If the Company Common Stock does not
maintain a sufficient market value, if the price of Company Common Stock is
highly volatile, or if potential acquisition candidates are otherwise unwilling
to accept Company Common Stock as part of the consideration for the sale of
their businesses, Workflow Management may be required to use more of its cash
resources or more borrowed funds in order to initiate and maintain its
acquisition program. If Workflow Management does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity offerings. The Company does not anticipate
utilizing Company Common Stock for acquisition purposes during the current
fiscal year.
Approximately $102.3 million, or 31.0% of the Company's total assets at
October 31, 2000, represents intangible assets, the significant majority of
which is goodwill. Goodwill represents the excess of cost over the fair market
value of net assets acquired in business combinations accounted for under the
purchase method. The Company amortizes goodwill on a straight-line method over a
period of 40 years with the amount amortized in a particular period constituting
a non-cash expense that reduces the Company's net income. The Company will be
required to periodically evaluate the recoverability of goodwill by reviewing
the anticipated undiscounted future cash flows from the operations of the
acquired companies and comparing such cash flows to the carrying value of the
associated goodwill. If goodwill becomes impaired, Workflow Management would be
required to write down the carrying value of the goodwill and incur a related
charge to its income. A reduction in net income resulting from the amortization
or write down of goodwill could have a material and adverse impact upon the
market price of the Company Common Stock.
Page 21
Risks Associated with Canadian Operations
Workflow Management has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 25.2% and 27.0% of the
Company's total net sales in the six months ended October 31, 2000 and the
fiscal year ended April 30, 2000, respectively. As a result, Workflow Management
is subject to certain risks inherent in conducting business internationally,
including fluctuations in currency exchange rates. Workflow Management is also
subject to risks associated with the imposition of protective legislation and
regulations, including those resulting from trade or foreign policy. In
addition, because of the Company's Canadian operations, significant revenues and
expenses are denominated in Canadian dollars. Changes in exchange rates may have
a significant effect on the Company's business, financial condition and results
of operations. Workflow Management does not currently engage in currency hedging
transactions.
For additional risk factors, refer to the Company's Annual Report on Form 10-K
for the year ended April 30, 2000.
Page 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's financial instruments include cash, accounts receivable,
accounts payable and long-term debt. Market risks relating to the Company's
operations result primarily from changes in interest rates. The Company's
borrowings are primarily dependent upon LIBOR rates. The estimated fair value of
the Company's long-term debt approximated its carrying value at October 31,
2000.
The Company does not hold or issue derivative financial instruments for
trading purposes. To manage interest rate risk on the variable rate borrowings
under the Credit Facility, the Company enters into, from time to time, interest
rate collar agreements to mitigate fluctuations in the Credit Facility's
variable base interest rate. At October 31, 2000, the Company had no outstanding
derivatives, swaps, collars or similar type agreements to mitigate such
fluctuating interest rates.
Page 23
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Workflow Management, Inc. held its 2000 Annual Meeting of Stockholders on
September 27, 2000. At the Annual Meeting, the following matters were acted upon
by the stockholders:
1. Election of Directors. The following persons were elected as directors to
serve a one year term, with the vote For and Withheld indicated below:
Director For Withheld
- -------- --- --------
Thomas A. Brown, Sr. 11,606,212 84,368
Thomas B. D'Agostino, Sr. 11,187,398 503,182
Thomas B. D'Agostino, Jr. 11,612,271 78,309
Steve R. Gibson 11,612,218 78,362
Gus J. James, II. 11,610,204 80,376
James J. Maiwurm 11,612,147 78,433
Peter J. Pakuris 11,606,132 84,448
Roger J. Pearson 11,610,174 80,406
F. Craig Wilson 11,604,212 86,368
2. Ratification of the appointment of PricewaterhouseCoopers LLP as independent
auditors for the 2001 fiscal year.
For Against Abstain
- --- ------- -------
11,643,709 38,967 7,904
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Amendment No. 1 to Amended and Restated Credit Agreement, dated as
of April 27, 2000, among Workflow Management, Inc., Data Business
Forms Limited, Various Lending Institutions and Fleet National
Bank, as Administrative Agent.
10.2 Amendment No. 2 to Amended and Restated Credit Agreement, dated as
of September 29, 2000, among Workflow Management, Inc., Data
Business Forms Limited, Various Lending Institutions and Fleet
National Bank, as Administrative Agent.
10.3 Amendment No. 3 to Amended and Restated Credit Agreement, dated as
of December 6, 2000, among Workflow Management, Inc., Data
Business Forms Limited, Various Lending Institutions and Fleet
National Bank, as Administrative Agent.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
Page 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WORKFLOW MANAGEMENT, INC.
December 15, 2000 By: /s/ Thomas B. D'Agostino, Sr.
- --------------------------------- -----------------------------
Date Thomas B. D'Agostino, Sr.
Chairman of the Board, Chief Executive
Officer, Director
(Principal Executive Officer)
December 15, 2000 By: /s/ Michael L. Schmickle
- ---------------------------------- ------------------------
Date Michael L. Schmickle
Chief Financial Officer, Executive
Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
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